Dollar extends gains after report about Greece

Strong U.S. payrolls report serves as catalyst to boost greenback

By

DeborahLevine

WilliamL. Watts

NEW YORK (MarketWatch) — The U.S. dollar extended gains against the euro on Friday, with the single currency falling 3.1% this week, following a report saying Greece is considering withdrawing from the euro zone.

“This is making everyone extremely nervous,” said Dean Popplewell, chief currency strategist at Oanda Corp. “It’s weighing on euro sentiment and could have huge ramifications if they actually do it.”

The dollar had been higher before the Spiegel Online report came out at midday, following a U.S. government report that showed the economy added far more jobs in April than analysts expected.

U.S. jobless rate inches up to 9.0%

(20:06)

The unemployment rate climbs back to 9.0% in April, while nonfarm payrolls expand by 244,000 — including the private sector's strongest gain since 2006.

The dollar index
DXY, +0.61%
which measures the greenback against a basket of six currencies, rose to 74.790, up from 74.211 before the U.S. jobs data and 74.143 in late North American trading Thursday.

The euro
EURUSD, -0.7347%
turned down to $1.4349, weaker than $1.4501 earlier and $1.4524 on Thursday.

Earlier this week, it touched the highest level since December 2009.

The euro’s loss this week is the biggest since early January.

For the year, the euro has still advanced 7.2%, making it one of the top-performing currencies against the U.S. dollar.

The shared currency on Friday has also lost 1.3% against the British pound
EURGBP, -0.6522%
and 1.1% versus the Japanese yen
EURYEN

Nonetheless, Popplewell said the euro could break up because the so-called peripheral countries want to escape the expensive bailouts they’ve had to accept, and countries doing the bailing out would also like not having to finance them. See Spiegel Online story.

Other analysts noted any shift that would be unfriendly to Greece’s bondholders would be very negative for German and French banks that hold a lot of debt issued by the peripheral countries.

Issues with peripheral debt have tended to periodically return then blow over, and the euro is likely to again find support from expectations of more interest-rate hikes for the region, Popplewell said.

Payrolls boost

Earlier, the dollar got a boost following the Labor Department’s monthly employment report, which showed the U.S. economy adding 244,000 jobs in April, higher than economists had forecast. The government also revised upwards data for February and March.The unemployment rate unexpectedly rose to 9% in April from March’s 8.8%. Read story on payrolls.

Analysts said traders expected a weaker number and priced that in during Thursday’s big rout that boosted the dollar and Treasurys.

Investors had pushed the dollar sharply higher Thursday as they unwound bets against the greenback and in favor of riskier assets, including stocks and commodities, amid signs that economic growth may be faltering.

“The dollar had been beaten relentlessly, so at some point the market was so short that we had to have a relief rally,” said David Watt, a senior currency strategist at RBC Capital Markets.

The dollar index rose 2.5% from last Friday, its first weekly rise in six weeks. It’s still off 5.4% this year.

So now investors will try to decide how the U.S. payrolls data will be read by the Federal Reserve, and whether it changes the central bank’s willingness to reverse some of the ultra-loose policy measures taken in recent years to combat the credit crisis and recession. Currencies of countries that have already raised interest rates or are expected to soon have done better than the dollar because higher rates make the country’s assets more attractive.

However, because of the rise in the unemployment rate — something politicians latch onto — “there is no implication for timing of a shift of Fed policy,” Brown Brothers’ analysts said.

Trichet and the euro

On Thursday, the greenback rose by the most since January 2009 against the euro, rallying after European Central Bank President Jean-Claude Trichet didn’t suggest that more rate hikes were imminent at his monthly news conference. Read more on ECB decision.

Trichet “refused to signal another ECB rate hike, prompting a huge liquidation of euro longs that spilled over into the commodities and equity markets,” said Boris Schlossberg, director of currency research at GFT, in emailed comments.

Traders will soon realize that the ECB pushing rate hikes off one month to July is still strongly preferable to the Fed, which won’t raise rates until the middle of 2012, Watt said.

“I can’t see this as the start of a sustained trend up in the dollar,” he said.

Another country benefitting from both rate-hike expectations and rising commodity prices, because they export them, is Australia.

The Australian dollar
AUDUSD, -0.2680%
jumped as high as $1.0757 on Friday after the Reserve Bank of Australia said that further policy tightening will be required “at some point” to keep inflation within its 2%-3% medium-term target range. It recently rose 0.7% to $1.0692.

The Australian dollar shed 1.7% on Thursday, pressured by below-forecast retail sales, as well as the broader pullback in assets perceived as risky.

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